If you have the money, would pay for a house all at once?
Or are there certain benefits to having a mortgage? Can anyone throw a little light on this.
To give you a little background. I've recently come into some money and have enough to buy my dream house with enough leftover to do some renovations.
Is it smart to just buy a house outright with no mortgage?
I did exactly what you are thinking about except it was a combination of my own savings and some I inherited. I bought my almost a dream house (it would be nice to have some more property). I own it free and clear. What I had left over went to some minor repairs and furniture. Best decision I ever made.
Suze Orman says YES!
If you are lucky enough to have the opportunity to pay cash in full for a house, absolutely do it. Not having a mortgage and owning a house free and clear is one of life's big rewards.
It depends on your financial situation generally and on your tax situation (assuming a mortgage interest deduction is possible and the actual benefit it provides) and the cost of the house.
If, for example, you had a lot more cash than regular income, then the benefit of a mortgage interest deduction is lessened down toward the difference in your interest payments less any tax benefit versus likely income in investment. Even at historically low interest rates, interest still comes at a cost, and the actual benefits of carrying or not carrying a mortgage vary from one individual to another.
If you are handy it makes sense to buy. If you're helpless, you should rent.
If you know you're bad with money, you should pay off the house and lock in money for real estate taxes.
I did. It was great.
Order a big check from your bank the day before, pick it up at the bank before heading to the attorney's office, give them the check, and get your new house keys.
Remember to put a little $$ in a savings account earning interest to pay for your property taxes each year.
Bing, bang, boom -- done!
Free and clear = a good night's rest.
Talk to a tax planner to see if the mortgage deduction would be worth financing it. I paid 50% down for a house, got 3.95% financing (which is lower than the last car loan I got) and am able to deduct all of the interest from my income tax, so basically the mortgage doesn't cost me anything. This way I didn't have to tie up all my cash in case I lost my job or something.
The interest rate for a lot of mortgages is less than interest/income that you would get with the most conservative of investment strategies. It would be wise to consult a financial planner that could show you the tax benefits of the mortgage and investment strategies that could earn you a few more $.
Doesn't paying off a mortagage, etc. gradually help your credit rating?
If you don't have enough *taxable* income for the mortgage deduction to do you any good, then by all means pay cash.
And I guess it goes without saying you should try very hard not to retire while still paying on a mortgage.
My idiot sister did this and is bitching and moaning more than usual since she did.
Even if the write-offs are not attractive, the income you can make in the investment market it. If you put down 20% on the house, you would likely get a nice interest rate (less than 4%). You can easily make 7% and up in the market with a conservative investment portfolio. Even if you were paying the mortage, you would still be earning an additional 3% or more from your investment. Of course that is going to vary a little depending on the amount of money you are dealing with and cost of the house.
[quote]You can easily make 7% and up in the market with a conservative investment portfolio.
Hasn't been "easy" over the past decade! Why gamble away a house for a potential 3% gain? I'd rather sleep at night, personally.
Yes, you are correct R11.
However, your way requires you keep up with everything constantly to make sure everything stays on track till the home is paid for. Some people, like me, don't want to fool with this botheration.
Therefore, I repeat:
"Free and clear = a good night's rest."
It's an endless debate in the financial community. For the most part, just about any advisor you visit will tell you to maintain a mortgage. It's not hard to show with a few reasonable assumptions why this is a better financial move.
BUT they don't get to play with your money if you use it to pay off a house. They don't get to invest on your behalf and generate commissions for purchasing and holding your account. In other words, they are just not unbiased. Not only that, these conversations pretty much ignore or dismiss the concept of risk.
I have a hard time believing that you could ever find anyone who regrets paying off their mortgage (or buying for cash in the first place). In theory, they could probably (but not definitely) have achieved better returns elsewhere, but so what? They owe nothing to no one, and that is a feeling that itself has real value which should be respected.
My vote is buy the house free and clear.
I agree. But a place outright.
If you want an income, buy a place with enough room to create a separate apartment or office that you can rent out for income.
Yes, and good luck!
Yes. Pay cash! If you can
This is a question I occasionally get from my tax clients, and the only real answer is "It depends."
First and foremost, it depends on what you would otherwise do with the money you are paying for the house outright. If you have other debts (especially high interest or consumer debt), those should be paid off first, before you buy a house for cash. If the money would otherwise be invested, it's likely (at today's interest rates and most investment returns) that you could save more money not paying mortgage interest, even though the latter may be tax deductible (Tax deductible doesn't mean it is FREE. If you are a 25% bracket, paying 5% on a mortgage still costs you a minimum 3.75% after tax savings.)
Some may say that, if you buy the house for cash, you can always use the equity to borrow against later, if you ened to do so. Not necessarily, since it depends on your credit worthiness at that point, which may not be as good as it is today. Interest rates on equity debt is usually significantly higher than loans used to actually buy a home, and tax law limits the deduction for home equity interest to no more than $100K of debt, even if your home is worth many times that.
Then again, I have seen people keep refinancing and extending their mortgage, seemingly forever, which they justify as providing a tax benefit for the interest. Basic concept: Unless you are in a 100% tax bracket (and nobody is, obviously), it NEVER makes sense to pay a deductible expense you don't really need to pay.
Taking out equity loans on a home is how many people got into trouble on their houses that past couple of years. If you can't get by without taking money back out of your house that way, then don't use all your cash to buy a house.
I'll tell you what paying cash for a house really means.
It means you don't have to come up with a big huge mortgage payment each month, and this fact alone gives you certain … options.
If you're working at a job that you detest, you don't have to stay on the job just to pay your mortgage.
You have a big chunk of money freed up each month that you then can invest to have a cushier retirement.
Or you can earmark some of the money and put it in interest-bearing accounts to pay for future big ticket items like a new car, a new roof, and big vacation. Or you can take out some old age insurance.
You in essence get an instant raise to spend however you wish.
"You can easily make 7% and up in the market with a conservative investment portfolio."
Wrong. A "conservative" investment portfolio would not produce a return of 7%.
Only risky investments could return 7% or more.
"Conservative" investments comparable to a fixed rate mortgage would be US Treasuries. And right now 30 year US Treasuries have a yield of 3% while 20 year Treasuries have a yield of only 1.9%.
HELL NO. It looks like we may have an even greater recession/depression in the very near future. Hang on to your cash or buy gold or invest in food stocks, but do not invest big sums in real estate. I know we're bombarded with info of the improving economy, and I for one hope it really happens, but there are too many possible reasons for tragic down turn in the economy for even a great president like Mr. Obama.
The economy fluctuations are now bigger than the financial power of the United States. We in the USA have too many stupid people holding too much liquidity. If they were a lot smarter, they would have used that liquidity to restart our cripple economy, instead, these stupid turnips were and remain more interested in conserving their current wealth. Just watch all that capital turn to feces in a few short months.
Yes, this will affect your holding too, but I think the real estate market may ultimately collapse.
You have to live somewhere, r22.
It may as well be paid for, wouldn't you agree?
I can perhaps understand better what you are opining as regards to investment real estate, but not one's domicile.
What hasn't been mentioned is if this is a second home.
I bought my dream house with cash but have a mortgage on my NY apartment (just recently refinanced at a great low rate!).
I have NO regrets about the house. It gives me great peace of mind that I own a home I love and will probably retire to eventualy.
Don't listen to me, r23. I really got off the track of the simple question being asked.
Of course buy a home for ones self is a solid purchase. Particularly if you live in a state like CA where the taxes are pretty much fixed for the entire time you own the property or until the law changes.
I'm just a goofy reactionary making too much noise.
George Clooney always pays cash for houses. He seems like he'd be a smart business guy.
[quote] George Clooney always pays cash for houses. He seems like he'd be a smart business guy.
He may be, but he's certainly very rich (estimates of his net worth are in the $130M to $210M range) which puts him in a lucky league of people for whom their housing costs --even with a $30M Italian villa in the mix-- are a comparatively small measure of their worth and/or income stream. The mortgage interest deduction is available only in a handful of countries, Italy not among them, and has its limits -- ask Nicolas Cage whose fortune was shot in part by overextending himself on endless expensive (and mortgaged) trophy properties. For people whose money is vulnerable to exposure to lots of managers and agents and advisors, owning real estate outright offers some measure of control and liquidity. The mortgage interest deduction may offer some benefits to the middle class, but to the solidly rich, it offers nothing worth the bother.
In 1990, I bought a 2br, 1ba condo for $40k. In 2007 a developer came in and bought us out. I sold it for $275k. I moved into an apartment and started looking for a house. I was very picky. So picky in fact that I still hadn't bought anything when the real estate market collapsed.
I finally bought a foreclosure last year. The house sold in 2007 for $400k. I bought it for $150k. I did a few cosmetic things. But most importantly, I have a nice chunk of money in case anything breaks.
My husband and I considered doing this, and decided against it. Even with the limited returns available in low-risk investments, the point is if you secure a very low interest mortgage and keep the cash at Sallie Mae you can always pay off the mortgage if you want, and you still have the cash available if you need it. However, once you've sunk every dime into the house, it's gone until you sell--and that's assuming you can sell for what you bought the house for, and with the proviso that you will of course always need money to pay for a place to live if you try to get money out of the house.
Mortgage cash now is pretty much the cheapest money you can get now--why not take advantage of it and hold on to your own cash? Again, if you ever feel compelled to pay off the house, you can as long as you don't throw the money away.
[quote]To give you a little background. I've recently come into some money and have enough to buy my dream house with enough leftover to do some renovations.
Good answers here, but going back to the OP's post, it sounds like he's thinking of basically putting all his money into this house (purchase price + renovations), and that's a huge mistake.
Sure, it's better to pay cash for a house, but only if you have enough money left over to handle job loss, economic downturn, medical emergencies, and 1000 other possibilities. I realize that paying cash gives you instant equity, but if the economy goes down that house might be very difficult and time consuming to sell. Ditto with going to the bank and borrowing against it. There is nothing worse than trying to liquidate an asset when you're under pressure.
The best piece of financial advice I ever got was to think of your finances like a 3-legged stool. Put 1/3rd in real estate, 1/3rd in stocks, bonds and other investments, and keep 1/3rd in cash. That way if one leg goes bad you're still upright, and you can wait for that 1/3rd to recover.
It's called being land-poor. You can own a million dollars worth of land but you can't eat it, wear it, or borrow against it if you cannot service the debt.
R29: It's not a choice for everyone. For anyone who is not cash rich or for whom housing is not a major expense relative their assets, mortgages have some advantages or points in their favor.
A (sensible) mortgage is a better form of debt than credit card interest and many other sorts of loans, and can afford a degree of buffer against various uncertainties.
In the U.S., about 70% of owner-occupied homes have a mortgage and 30% are owned outright. The number of people who have the luxury of choosing between purchasing in cash vs. mortgage is almost certainly much smaller than the least of those figures.
OP doesn't answer if and how much money he receives on a monthly or yearly basis (salary, profits, commissions, sales, etc.).
If he is in financially stable condition and has enough money to finance his lifestyle (health care, food, clothes, going out, eventually vacations, etc.), property taxes, and unforseen mishaps or misfortune then by all means he should do it. It is his dream house after all.
I can pay off my house, and will always keep the mortgage as long as I can get a low rate. Besides the tax benefit, the MORTGAGE IS A HEDGE FOR THE PRICE OF THE HOUSE FALLING.
Most people don't understand this. Interest rates are at an all-time low. If rates go up, housing WILL FALL. Most people don't buy a "$500,000 house," they buy a "$3500/month mortgage." They don't look at the price of the house, they calculate how much of a mortgage payment they can afford.
If rates go up, the monthly payment goes up, and therefore less people can afford the same house. So the price of the house has to fall to get that monthly payment down.
Sometime in the next 10yrs, rates are going to go back up, it would be nice to have a low 30yr mortgage. You pay off your low-interest mortgage while keeping investment cash in higher-yielding investments.
It is slightly easier to understand with a car because a car is absolutely a depreciating asset from the moment you drive off the lot. Essentially, you could pay cash for your car. That is a losing proposition because you pay 30,000 today and tomorrow your car is worth 25,000. It (hopefully) will depreciate a much slower rate after that, but it will depreciate.
Finance and you are losing value. Pay cash and you are losing CASH. I try to keep the value of the car at slightly higher than the note, in order to have some trade in value if necessary, but there is no reason to own more of the car than you are paying for.
This is the theory behind a lease, but the conditions attached to a lease contract (most importantly MILEAGE) make it a bad deal for most people.
Huh? I'm not following R35. Regardless of whether you finance or pay cash for a car, it depreciates at the same rate--and either way, YOU are responsible for that amount. When you finance a car, you not only lose $ to depreciation but also to finance charges. How is that better??
Because you have not put the actual money into the car itself yet.
Is it true that interest rates can't go above 5% now or else the gov't defaults on its debt?
I wouldn't allow some of you manage MY money, much less pay you.
Bottom line: Everyone's financial situation is different.
For many, owning a house free and clear is a wonderful feeling, but for others, there are extenuating factors that must be considered.
If you have enough money to buy the house you want outright and still have a nice amount left over as a nest egg then you'd be a fool (IMO) to finance it. But if it would take every dime you have to buy the house and you'd be left with no savings I'd say put a huge chunk down and finance a much smaller amount so you'll still have a sizable emergency fund.
You might save a little in income taxes by having a mortgage, but isn't that somewhat negated by all the fees associated with taking out a mortgage in the first place?
Only get a mortgage if you have a reliable investment opportunity that will pay an almost certain percentage that is higher than your mortgage interest.